Money Growing: To class A

PERM The commercial real estate market on the border of Perm has passed from quantitative growth to qualitative. Class A premises have stopped being a rarity. But if in individual segments the occurrence of high quality premises is a logical stage of development, in others it is a fast jump forward.

Offices on the heels of habitation

At the beginning of 2007 the first class A business center entered the office premises market - Slavyanovsky (total area – 7,000 sq.m) with Perspektiva acting as the developer. Before its delivery experts doubted that there would be enough demand for offices that cost 1,200 rubles per sq.m per month in rent. But doubts were dispelled, when all the premises were filled with tenants, with Lufthansa and MDM-Bank among them. However under the most recent system of office classification, that has been approved by the four leading broker agencies in the capital, Slavyanovsky does not meet category A standards as it has several owners.

In 2007 the delivery of two more class A premises are planned. They are the Avangard business center at 26 Oktyabr Ulitsa and Parus business center on the crossroads of Ostrovskaya Ulitsa and the quickly developing Revolyutsi Ulitsa. The area of the first will total 4,500 sq.m, and the second – 5,500 sq.m. Concerning the classification of Parus, Perm analysts do not share a common opinion - the building is located on a busy crossroad and has no parking places, apart from those located along the facade.

By the end 2007 in Perm the delivery of almost 50,000 sq.m of office space is planned. The commissioning of a shopping-administrative complex at 9 Lodygina Ulitsa, and a class B office building at 8 Gaydar Ulitsa is expected. The Yuzhny business center with an area of 22,300 sq.m which is being built by Stroyindustriya is also being prepared for opening.

The financial-construction company is starting the construction of the 20-storey high-altitude, class B Green Plaza business center on the territory of a former sports club on busy Uibesheva Ulitsa. According to the company, the area of the premises will total 45,500 sq.m. It is expected to include shopping areas, offices, a sports club with a 25-meter pool and a three-level underground car park with 286 places. Investments in the project will total about $73-80 million.

Parallel to the construction of new business centers in the city is the reconstruction of existing office buildings. At the start of 2008 the reconstruction of home appliance store Agat on Turgeneva Ulitsa should be completed. By the end of 2007 the delivery of the Sergo business center on Ordzhonikidze ulitsa is planned (one of the former buildings of the VKIU military institute).

Investment companies are becoming active real estate market players. Investment group Vitus is constructing a business center on Klara Tsetkin Ulitsa. The group also wants to construct another building near to a former institute that belongs to them that has been reprofiled as a business center. An area in front of a river mooring where Pechnik shopping center and the Sadovod shop, earlier bought by Vitus, are now located, are in the company's plans. The buildings will most likely be taken down. The concept of the new complex is not certain yet, the company has still not decided whether it will be an office or a shopping center.

Finance group Ermak has planned to reconstruct the PKTB Khimash office center which it owns and is worth $10 million As a result of the reconstruction the area of the premises will be increased from 8,000-20,000 sq.m.

The volume of new office premises is growing in the city, but offices are not becoming cheaper. Experts name the principal cause of a rise in prices in the office segment is a rise in prices in the residential segment. The jump in prices for apartments from the fourth quarter in 2006 until the first quarter of 2007 has contributed to a rise in prices for office premises also. It is caused by the fact that 50% of office real estate offers in premises located in apartment buildings, are constantly being replenished with new buildings. The high prices on the market for ready housing and that under construction has logically lead to a rise in prices for residential floors that have been reprofiled as offices. And already following them, the price for offices located in business centers has also increased, Regina Davletshina, an analyst at Perspektiva says.

According to Perspektiva, at the end of June, 2007, it was possible to buy an office in an class A administrative center for an average of 140,000-150,000 rubles per sq.m. For class B and C offices in Perm more democratic prices have been established. At the end of the second quarter a sq.m could be bought for 65,000-75,000 rubles and 40,000-50,000 rubles respectively.

Igor Golubev, director of the Real Estate for Business center at Perspektiva, says that in comparison with last year demand for good quality office premises has increased, in particular for sizes from 300 to 800 sq.m. The status of tenants has changed, interest from nonresident companies has increased. "With good promotion and correlation between price and quality an office will be on the market for sale for on average 1-3 months, and to find tenants will be on the market for no longer than a month," he says.

According to Andrei Yaroslavtsev, the general director of MVM, there are not enough offices in the city center. "In Perm there are no premises that would suit banks, for example. These are areas measuring 200-400 sq.m on the ground floors of residential buildings," he says. And in the opinion of Andrei Tuev, chairman of the board at Ekoprombank, in the near future the number of banking organizations in the Perm region may grow approximately two times. According to the central administrative board of the Central Bank within the boundaries of Perm as of January 1, 2007, there were 68 credit organizations operating.

Yaroslavtsev agrees that offices in the city center are quickly absorbed by the market and in the near future demand for them from commercial organizations will be unsatisfied.

Disproportion of trade

In the shopping real estate market, as well as in the office segment, since the beginning of 2007 there has been an active rise in prices. For the first half-year prices rose 45 per cent, with the average price per sq.m coming in at 63,000 rubles. As well as in the case with offices, experts are inclined to blame the residential real estate market for the rise in prices of shops. Average rental rates for trading premises were established at 720 rubles per sq.m, an increase since the beginning of the year of 5-10 per cent. The most active growth is noted on trading premises located in central areas of the city, on average the price here has increased 60-70 per cent. In areas remote from the center the growth in prices was 25 per cent, the lowest figure for the first half of 2007.

The shopping real estate market continues to be replenished with high quality areas. Among the premises planned to be delivered within 2007, is the second phase of the Kolizeya shopping center. The third stage is planned to be built and put into operation in 2009 with the total area of all three phases measuring 95,000 sq.m. The total sum of investments in the construction of Kolizeya will be approximately $150 million. The developer of the project is a financial-construction company.

Construction of the second phase of Semya hypermarket on Ploshchad Revolyutsii (developer - EKS) is near completion. It will measure 70,000 sq.m, with investments in the project totalling $40 million. In the market nonresident players are becomign more active. "Sedmoi Kontinent is building Shokolad shopping-entertainment center with an area of more than 20,000 sq.m. The main tenant will be Nash hypermarket.

According to Yaroslavtsev, the arrival of foreign operators is a positive trend in the market. "As a rule, they bring anchor tenants and create a stream of buyers in shopping centers," he says. IKEA at last has plans to come to Perm. The Swedish chain has acquired a site in Kondraovo, near to the Metro Cash & Carry shopping center. The press-service of the governor of the Perm region earlier announced that IKEA was looking for a site measuring 45-60 hectares. A date for the start of construction has not yet been set, but it will take 15-18 months to build.

“Also in Perm the construction of a Sportmaster hypermarket with an area of 10,000 sq.m is possible, representatives of the chain have informed. The total area of all new shopping centers which will come onto the market in 2007-2008, according to the estimations of experts, will be more than 150,000 sq.m.

In the background of the dynamical input of new areas there are already problems in filling existing shopping premises and those under construction. "Demand for high quality trading areas in Perm exceeds supply. As for the demand for premises, the success of a premises directly depends on the right concept, good parking zones, the correct calculation of the target audience and pool of tenants corresponding to the audience. If these requirements are fulfilled there will be no problems in filling areas," says Golubev.

In Yaroslavtsev's opinion, the reason for the present and future problems of trading real estate is that the majority of shopping centers open in the central area of the city. "There are two variants for what may happen. Either consumers will get used to going to the center for purchases and problems with filling shopping centers will not arise. Or people will choose shops more close to their houses and then there will be a serious struggle for tenants, from which the shopping centers located in the central part of Perm will suffer from," says Yaroslavtsev.

The problem of warehouses

Warehouses traditionally are not the most developed segment of the market in Perm. The largest warehouse complex is the Permryba terminal measuring 20,000 sq.m and belongs to Mai.

Norma, the company that owns the Norman-Vivat chain of stores, intends to build a logistics center measuring 30,000 sq.m on the basis of the Velta complex (a former bicycle factory). But if the Mai warehouse works for the market by rendering contracted services, the Norma logistics center will serve the internal needs of the company.

Market participants and authority representatives fully understand the problem of the shortage in high quality warehouses. At the end of April, 2007, under the initiative of the governor of Perm, a round table was held in which worked Perm logistics operators, and also representatives of medium and large businesses. Logistika presented to the participants the concept of creating a logistical center in the region. In its opinion, the region requires a general large information complex which would coordinate and render logistical services.

The new complex will be organized in the form of a regional logistics center, with the regional administration announcing that it wants to co-finance it. The area of the prospective complex is 100,000 sq.m, with investments of 3 billion rubles.

Liniya-7, which is engaged in the sale of food stuffs, has become an active player in the logistics business. In the next 5 years it plans to invest 1.5-2 billion rubles in the construction of a class A logistics center in the Perm region and in the Urdmurtia republic. With these funds a logistics center measuring 50,000 sq.m and also several regional warehouses measuring a total of 20,000 sq.m will be constructed. Liniya-7 is currently finishing the construction of the first class A warehouse in Perm, measuring 3,000 sq.m.

In Ananev's opinion, the project is quite justified. "The logistics business does not bring high profits, therefore for a high quality warehouse the operator will ask a high price and can reduce the period of recovery of the outlay of the premises," he says. By Yaroslavtsev's estimations, a good level of profitability for the logistics business is 15-20 per cent a year.

Under the Hilton brand

The hotel business in Perm is in a bit better condition than logistics. Recently some modern hotels have been built in the city. The market capacity of the hospitality industry by the estimations of analysts, is 4,500-4,600 hotel rooms. The leaders by quantity of hotel rooms is the Ural hotel complex (420 rooms), Prikamye (150 rooms) and Amaks Premier-Hotel (140 rooms). Several more hotels have up to 70 rooms, and the remaining two thirds of hotels have from three to 10 apartments.

Interest in the Perm market is being shown by international operators. The Plaza Olympia hotel Mira Ulitsa will be renamed the Hilton in a few months. A franchising agreement for the use of the brand with the operator has already been concluded.

The possibilities of attracting international operators are also being considered developers who only plan to build hotels. A financial-construction company has announced plans to build a 4* hotel with 198 hotel rooms near Kolizeya. EKS is studying the possibility of constructing a hotel near the Semya hypermarket. And Renova is considering constructing a 25-floor hotel near to a regional administration building for $60-70 million (including the reconstruction of neighboring pre-revolutionary buildings ).

Competition for hotels may become apartments. " Two companies - Vils and Stroyindustriya - are showing interest in this market. However, Vils is only planning to start work, while Stroyindustrita is already building its first "profit" building in Perm that focuses on business-tourists.